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Credit-score age gap

The old adage “with age comes wisdom” appears to hold true when it comes to financial management, according to a Federal Reserve Bank of New York report on debt.

Credit scores, which play a critical role in borrowing money, clearly go up on average as we get older. The generational divide is as deep with credit scores as it is with musical tastes for 20-somethings and those of retirement age.

In 2016, only 16 percent of consumers under age 30 met financial website Credit Karma’s good credit score threshold of 720 and higher, compared with 77 percent of consumers aged 70 and older. For the years in between, average scores steadily got better with each age group from young to old.

“I think you do make wiser decisions as you get older, although there are exceptions,” said Diana Dorn-Jones of United South Broadway Corp., a nonprofit community organization in Albuquerque that provides financial and mortgage counseling.

A joint University of Texas and Texas A&M research study, “With Age Comes Wisdom: Decision-Making in Younger and Older Adults,” analyzed why older people make better decisions and basically found that their decision-making experience makes them better at weighing risks and rewards.

The rise in credit scores with age also sheds light on the evolving relationship that the average consumer has with debt throughout his or her life, Dorn-Jones said.

(Russ Ball/Albuquerque Journal)

The early years

The early adult years are often characterized by a lot of borrowing for what Vicki Van Horn of the New Mexico Project for Financial Literacy called “the start-up costs associated with becoming an adult” – primarily student loans, car loans and credit-card debt.

“They’re betting on success in their future,” said Sharron Welsh of the Santa Fe Community Housing Trust about the bubble of 20-something debt.

Borrowing by “the young and the riskless,” as the Fed debt report described the 19-29 age group, was a decisive factor in making 2016 the first four-quarter increase in total outstanding consumer debt since 2008. At the same time, it is an age group characterized by slim financial resources.

Credit, which produces debt, is critical to the economy because it enables consumers to purchase goods or services that they otherwise could not afford. The alternative of a cash-only economy would not be a very vibrant one.

Student loans, for example, enable young people to get the education or training needed for financial success later in life. The sheer volume of student loans, which is the fastest-growing form of consumer debt, has raised alarms about the financial future of many of the borrowers.

“The cost of an education has never been higher for the average student,” Van Horn said. “Young adults and their parents seem to take on student loans without doing a hard analysis of how the education will cost-justify.”

Welsh noted, “Not long ago, a student mentioned to me that a student loan doesn’t have to be spent on tuition, fees and books. It can be used for other expenses and often is. It’s an indicator that the under-30 group is sorely cost burdened.”

Student loan factor

A Fed analysis shows 40 percent of the under 30 group and 25 percent of the 30-39 group carry student-loan debt. The average outstanding balance is $23,300 per borrower.

The delinquency or past-due rate on student loan debt was 27 percent in 2011, with the highest delinquency rate among 30-somethings at 34.2 percent. Student loan debt is not dischargeable, meaning the borrower can’t get out of it by filing bankruptcy.

For comparison, the delinquency rate for credit cards and car loans tends to run at about 10 percent, according to a Fed analysis.

Since length of credit history is part of a credit score, student loans and other debt can weigh heavily on the scores of young people because they lack a track record of paying off debt, Van Horn said. In addition, defaults or other credit mishaps can take a toll on scores.

“Most of these folks recover and rebuild their credit as longer-term goals such as homeownership or getting married come into view,” she said.

The learning curve for making sound household budget decisions and understanding the consequences of debt can of course be shortened by some financial management instruction available in different forms by nonprofits such as United South Broadway, the Project for Financial Literacy and the Santa Fe housing trust.

Twenty-somethings can hurt their credit scores when they think they’re doing the right thing, like shopping multiple sources for the best car loan or credit-card deal, she said. Each time a potential lender or credit-card company runs a credit check, the individual’s score takes a ding.

“I always tell young people to be cautious as they venture out into the world of credit,” Dorn-Jones said.

Quality of credit

Into the peak earning years of 45-54, consumers are in an expansive mode financially, and their predominant form of debt is a mortgage on their house. Mortgage debt dwarfs all other forms of consumer debt.

“A small portion of the credit score is the quality of credit one has, with secured credit such as a mortgage seen as better-quality credit than unsecured credit such as credit cards,” Van Horn said. “Older borrowers are more likely to have a better quality of credit than are young adults.”

Taking on new debt tends to diminish later in life, Welsh said.

“By their 60s, they’re shoring up their finances and trying to hold things steady,” she said.

A few years ago, Welsh said her 80-something father encountered a problem with his car insurance carrier, which was threatening to cancel his coverage because he had no credit score. Her father owned his home outright, had bank accounts and paid his bills by check but hadn’t had any installment debt for years.

“It wasn’t that he had bad credit, he had no recent credit activity,” she said. “I thought it was kind of punitive on the elderly.”

The consensus advice is for consumers of any age to check their credit scores for errors. You can get a free annual credit report at annualcreditreport.com, according to the Consumer Financial Protection Bureau.

Regular checks are particularly important in New Mexico because there are so many common surnames, which increases the potential for information on someone with a similar name being posted to your account, Dorn-Jones said.